Social Security is crucial to the middle class

The trustees’ report that details the financial health of Social Security gets published each and every year with much fanfare and analysis. But there’s another publication that the Social Security Administration puts out each year that deserves just as much fanfare—a sort of FAQ for Social Security.

There’s plenty to glean from this year’s version of the report—Fast Facts & Figures about Social Security, 2013. One can learn, for instance, what to do or not do when it comes to one of the most important sources of income in retirement and who Social Security reform might affect. Here’s what advisers say you need to know about this year’s report.

Social Security is indispensable for the middle class

“I’m always struck by the vital importance of Social Security income for most seniors,” said Jonathan Peterson, the author of “Social Security For Dummies.”

“To me, this is a reminder that Social Security is incredibly important for the middle class, as well as the less affluent—a basic, simple fact often overlooked in discussions about its role and its future,” said Peterson. “In a world where defined-benefit pensions are increasingly scarce, savings rates are low, home values have fallen, stocks are volatile and older workers often struggle in the labor market, Social Security income is indispensable for the middle class.”

From the report, Relative Importance of Social Security, 2011: In 2011, 87% of married couples and 85% of nonmarried persons aged 65 or older received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 52% of aged beneficiary couples and 74% of aged nonmarried beneficiaries. It was 90% or more of income for 22% of aged beneficiary couples and 45% of aged nonmarried beneficiaries. Total income excludes withdrawals from savings and nonannuitized IRAs or 401(k) plans; it also excludes in-kind support, such as food stamps and housing and energy assistance.

Source: Social Security Administration calculations from the March 2012 Annual Social and Economic Supplement to the Current Population Survey. NOTE: An aged unit is a married couple living together or a nonmarried person, which also includes persons who are separated or married but not living together.

Social Security reform

According to this chart, a relatively high proportion of certain population groups (35% on average) rely on Social Security for 90% or more of their income. “This is important when considering Social Security reforms that cut benefits,” said John Turner, director of the Pension Policy Center.

Others agree, but note the certain demographic segments are more likely to be affected by Social Security reform than others. With 35% of people age 65 and up relying on Social Security for more than 90% of their income, one thing is as clear as ever, said Mike Piper, author for “Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less” and author of ObliviousInvestor.com blog.

“The changes—whether increased taxes or decreased benefits—are going to be borne by people who are either higher-income or not yet old enough to receive benefits,” said Piper.

Don’t underestimate Social Security as source of income

Another nugget in the report, according to Anna Rappaport, the president of Anna Rappaport Consulting, is how important Social Security is as a source of income. The percentage of married couples and nonmarried persons aged 65 or older receiving Social Security has risen 17 percentage points, from 69% in 1962 to 86% in 2011, she noted.

Research, according to Rappaport, has shown that people not yet eligible for retirement often underestimate the importance of Social Security as a source of income. Don’t be one of them.

Other experts, meanwhile, stress that you shouldn’t overestimate the importance of Social Security either. “For people currently working, even if you do get the benefits promised by the current system, Social Security (with an average monthly retirement benefit of $1,262) is not going to pay for you to have a comfortable retirement all on its own,” said Piper.

Piper’s advice: “While it’s important to educate yourself about your benefits so that you can make the most of them, it’s crucial to build a retirement strategy that relies primarily upon savings rather than Social Security unless you’re happy with a very modest standard of living.”

The report also highlights that traditional pensions are still an important source of income, or at least that’s the case for current retirees. For instance, the percentage of Americans aged 65 and older receiving private pensions has risen from 9% in 1962 to 27% in 2011 and the percentage receiving government pensions has risen from 9% in 1962 to 15%.

“It’s fashionable to say private pensions are a thing of the past, said Andy Landis, a MarketWatch RetireMentor, founder of Thinking Retirement and author of “Social Security, The Inside Story” and “When I Retire.”

It’s also common to hear that Social Security is less important to retirees than it was in the past, as 401(k)s allow a generation of workers to retire with invested assets, Landis said. “But compared with 1962, Social Security now provides a bigger share of income (36% vs. 30%) and assets provide a smaller share (11% vs. 15%),” he said. “Social Security continues to outstrip all other sources of income as the most important.”

The importance of the claiming decision

The SSA report also highlights, though not directly, the importance of the Social Security claiming decision to long-term security, said Rappaport. “We know that the largest number of people claim early but that this is not in the interest of people who live long, and particularly not in the interest of many widows,” she said. “For people with limited retirement assets, this is a critical part of their retirement planning.”

For her part, the fact that Social Security accounts for 90% of income for 35% of all beneficiaries illustrates the need to plan ahead for when and how to take Social Security, said Angela Deppe, co-author “It’s Your Money! Simple Strategies to Maximize Your Social Security Income.”

Deppe also noted that 5.7 million new beneficiaries received Social Security benefits in 2012. Of that number, 48% were retired workers, 37% were survivors or spouses and children of retired and disabled workers, and 17% were disabled workers. “Given the large percentage of survivors and spouses/children receiving benefits, it emphasizes the importance of making a joint decision when planning to take one’s individual Social Security benefit,” Deppe said. “The age at which a retiree takes his/her individual benefit can impact the amount received by the survivor and spouse.”

What’s more, Deppe noted that there are more than 56 million Americans who currently receive Social Security benefits. Some 65% are retired workers, 20% are survivors or spouses and children of retired and disabled workers, and 15% are disabled workers. “Again, these percentages emphasize the importance of planning ahead and making a joint decision of when and how to take Social Security,” she said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.